SEATTLE–(BUSINESS WIRE)–Russell Investments strategists believe a recession looks likely in 2023 and equity markets could struggle, but a global economic recovery should be on the horizon by the end of the year.
“The main question for 2023 is whether inflationary pressures are easing enough to allow central banks to move away from rate hikes and possibly start to ease,” he said. Andrew Pease, Global Head of Investment Strategy at Russell Investments. “We expect inflation to be on a downward trend as global demand slows. This should allow central banks to eventually change direction and could set the stage for the next economic recovery.
Pease added that he expects the next U.S. recession to be relatively mild, particularly because household and corporate balance sheets are in good shape. Aside from inflation, he sees no obvious significant economic imbalances.
“It’s reasonable to expect a recession in 2023 to see GDP fall less and unemployment rise less than the average for modern recessions,” Pease said.
Russell Investments’ key views on asset classes for 2023 include:
Fixed income securities will make a comeback after experiencing the worst year for returns in 2022.
Long-term bond yields are expected to decline moderately as recession risk looms. The team’s target is 3.3% for the 10-year US Treasury yield by the end of 2023.
Equities have limited upside potential with recession risk on the horizon.
The US dollar could weaken at the end of 2023 as central banks begin to reverse rate hikes and investors begin to focus on a global recovery.
A weaker US dollar could be the trigger for non-US developed market equities to eventually outperform US equities, given their more cyclical nature and relative valuation advantage over US equities. A weaker US dollar could also trigger emerging market outperformance.
“Overall, 2023 is likely to be the year of the diversified portfolio, where a traditional balanced portfolio of 60% stocks and 40% fixed income does well,” Pease said.
As 2022 draws to a close, Russell Investments’ cycle, value and sentiment investment decision-making process points to an uncertain outlook for the global stock market. The team’s conclusion for equities is that the cycle is poor but could improve, value is expensive at best at fair value and sentiment is still favourable.
Meanwhile, the team’s process concludes that government bonds are attractive as the cycle turns favorable with inflation expected to ease and central banks slowing the pace of tightening and potentially pausing in early 2023. Additionally, the value turned positive after yields rose. this year and the sentiment is also favourable.
The firm’s strategists summarize their current asset class preferences as follows:
Although non-US developed stocks are cheaper than US stocksthe team has a neutral preference until the Fed becomes less hawkish and the US dollar weakens.
- Emerging Markets Equities could rally if there is significant stimulus from China, the Fed slows the pace of tightening, energy prices fall and the US dollar weakens. For now, the team feels a neutral stance is warranted.
- High Yield, Investment Grade Credit spreads are close to their long-term averages, although the overall US high yield return at nearly 8.5% is attractive. Spreads will come under upward pressure if the probability of a recession in the United States increases and if there are fears of an increase in defaults. The team has a neutral outlook on credit markets.
- State bond Valuations have improved following the rise in yields, and the team sees US, UK and German bonds as offering good value and Japanese government bonds as offering fair value. “The risk of another big selloff appears limited given that inflation is close to peaking and markets have set a hawkish outlook for most central banks,” Pease said.
- real estate: Real estate investment trusts look attractively valued relative to global equities and listed infrastructure, and the team believes they should benefit from falling bond yields. The team sees the outlook for commodities as mixed, given the expected slowdown in the global economy. “The outlook for the energy market is complex, as recessions will reduce demand for oil, but supply could tighten if more restrictions are imposed on Russian oil exports,” Pease said.
The American dollars (USD) has made gains this year thanks to the Fed’s hawkish policy and safe-haven appeal during the Russia-Ukraine conflict. The team believes the USD could weaken if inflation starts to decline and the Fed adopts a less hawkish stance in early 2023. The team believes the Euro and Japanese Yen would be the main beneficiaries .
For more information, please see the Global Market Outlook 2023
About Russell Investments
Russell Investments is one of the world’s leading investment solutions companies offering a wide range of investment capabilities to institutional investors, financial intermediaries and individual investors worldwide. Building on an 86-year legacy of continuous innovation to deliver exceptional value to its clients, Russell Investments works every day to improve the financial security of its clients. The company has $274.3 billion in assets under management (as of 09/30/2022) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including New York, London, Toronto, Tokyo and Shanghai.
Forecasts represent predictions of market prices and/or volume patterns using variable analytical data. It is not representative of a stock market projection, or of any specific investment.
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